Excerpts from the testimony of Deron Smithy, Treasurer of Regions Bank, on behalf of the Regional Bank Coalition:
It is appropriate for the Committee to consider whether a $50 billion threshold is the best way to define a SIFI, particularly since more stringent regulatory oversight should focus on those firms whose individual stress or failure might trigger or deepen a financial crisis or destabilize the economy. This does not describe regional banks despite our importance as lenders in many communities. Regional banks fund ourselves primarily through core deposits and we loan those deposits back into our communities, where we are important sources of credit to small and medium-sized firms and we compete against banks of all sizes in our markets. Regional bank are not complex: we don’t engage in significant trading or international activities, make markets in securities, or have meaningful interconnections with other financial firms.
Dealing with the issues of SIFIs is crucial to the stability of the financial markets and national economy; we do not want to repeat the events that led up to the recent financial crisis and recession. Yet, an overly broad definition that captures traditional lenders has consequences too. These rules have a direct impact on a bank’s strategic direction including its interest in specific product lines and asset classes; moreover, these rules can reduce a bank’s ability to support local economic activity through lending. The impact in cost and time to meet all of the more stringent standards is a disproportionately larger burden on the regional banks. For regional banks, the incremental costs of regulatory compliance to meet the more stringent rules far exceed a billion dollars collectively.
What regional banks seek is a regulatory architecture that helps the country promote economic growth in tandem with safe and sound banking activities. Thirty-three banks are currently SIFIs, placing the same baseline burden on regional banks and complex money center banks. While the regulators occasionally tailor rules for the SIFI class, it is important to recognize that with an automatic threshold, the tailoring operates only as a one-way ratchet up. Because the threshold for more stringent rules exists as a floor, it separates regional banks from many of their peers and competitors, while occasionally adding new requirements for the most complex firms. Moreover, the expansion of reporting requirements—as with liquidity and capital rules—effectively undoes many of the benefits, in cost and compliance, of existing tiering.
Now that more data is available about the scope of the Dodd-Frank regulatory regime and the nature of systemic risk, it is appropriate to question whether there is a commensurate benefit to having regional banks automatically subjected to this oversight regime. This is apparent in the recent Office of Financial Research’s (OFR) study that used systemic indicators that the Federal Reserve has gathered from banks. Altering the threshold in a common sense manner will not remove regulators’ discretion to stop risky behavior or weaken their supervisory powers. Even absent systemic designation, protective regulatory guardrails that have evolved since the financial crisis would remain in place for regional banks, including the capital planning and stress testing processes started before Dodd-Frank. Regional banks also would remain subject new Basel III standards as well as Consumer Protection Financial Bureau (CFPB) oversight.
By holding this hearing, the Committee recognizes the validity of reevaluating the $50 billion threshold for SIFI status and more stringent regulation. Creating a dynamic, business activity-based approach in its place would not only establish a fairer method for supervising banks, but it would strengthen regulators’ ability to appropriately tailor rules and deploy their own resources to match differences among banking organizations. Regulators have used activity-based factors—including size, complexity, international activity and substitutability—in other contexts to determine how firms might impact the stability of the financial system. And these instances have led to far different and nuanced conclusions than the asset-only $50 billion line.